John Williams writes:
Bets as forecasts come up on your blog from time to time, so I thought you might be interested in this post from RealClimate, which is the place to go for informed commentary on climate science.
The post, by Gavin Schmidt, is entitled, “Don’t climate bet against the house,” and tells the story of various public bets in the past few decades regarding climate outcomes.
The examples are interesting in their own right and also as a reminder that betting is complicated. In theory, betting has close links to uncertainty, and you should be able to go back and forth between them:
1. From one direction, if you think the consensus is wrong, you can bet against it and make money (in expectation). You should be able to transform your probability statements into bets.
2. From the other direction, if bets are out there, you can use these to assess people’s uncertainties, and from there you can make probabilistic predictions.
In real life, though, both the above steps can have problems, for several reasons. First is the vig (in a betting market) or the uncertainty that you’ll be paid off (in an unregulated setting). Second is that you need to find someone to make that bet with you. Third, and relatedly, that “someone” who will bet with you might have extra information you don’t have, indeed even their willingness to bet at given odds provides some information, in a Newtonian action-and-reaction sort of way. Fourth, we hear about some of the bets and we don’t hear about others. Fifth, people can be in it to make a point or for laffs or thrills or whatever, not just for the money, enough so that, when combined with the earlier items on this list, there won’t be enough “smart money” to take up the slack.
This is not to say that betting is a useless approach to information aggregation; I’m just saying that betting, like other social institutions, works under certain conditions and not in absolute generality.
And this reminds me of another story.
Economist Bryan Caplan reports that his track record on bets is 23 for 23. That’s amazing! How is it possible? Here’s Caplan’s list, which starts in 2007 and continues through 2021, with some of the bets still unresolved.
Caplan’s bets are an interesting mix. The first one is a bet where he offered 1-to-100 odds so it’s no big surprise that he won, but most of them are at even odds. A couple of them he got lucky on (for example, he bet in 2008 that no large country would leave the European Union before January 1, 2020, so he just survived by one month on that one), but, hey, it’s ok to be lucky, and in any case even if he only had won 21 out of 23 bets, that would still be impressive.
It seems to me that Caplan’s trick here is to show good judgment on what pitches to swing at. People come at him with some strong, unrealistic opinions, and he’s been good at crystallizing these into bets. In poker terms, he waits till he has the nuts, or nearly so. 23 out of 23 . . . that’s a great record.
To my knowledge Bryan Caplan has never stated how many bets he has turned down. 23 wins in 23 tries is obviously an excellent record but we don’t know how many were not selected. I am not denying it also takes skill to analyze a bet and decide whether you want to go all in on it (those running investment portfolios do this every day with real money on the table). I would be more interested in Caplan’s decision making process for not accepting a bet which I think is the real important thing. There may be others who have equally good records but don’t publicize it.
In all of these cases Caplan is betting status quo where there’s an extremely high probability that the status quo will win. He’s betting against silly claims like “Dow 36,000” (in the year 2000) or Ron Paul for President (never) or France & Germany leaving the Euro (never). A few months ago various commentators were blabbering about a 50% decline in stocks. Betting against that would have been a great bet for Caplan.
The real question is how does he find people to bet against him?
The answer – and an important point missing from the above discussion of the value of betting in assessing the probability of the outcome of the bet – lies in the size of the stake. It’s easy to find people to take a bad bet when the stake has so little value to them. Surely Caplan and most of his opponents can dig $20 or even $100 out of their respective penny jars. To put it in poker terms, Caplan has A-A-A-K showing and three cards in the hole and he’s betting a quarter on it to keep people from folding.
Who would bet real money – even $1K – on France leaving the Euro or Ron Paul being elected president?
Small addendum: Caplan’s perfect streak will almost certainly be broken by his ongoing global temp bet [1]. But that won’t technically resolve until the late 2020s, so while it appears to be a clearly “losing” proposition, something else may well break the streak first.
To be clear, not that this changes any of the major conclusions. Caplan’s views on climate change strike me as weird, but 23-1 would still be an insanely impressive track record! It’s not easy to interpret forecasting track records (when it covers a diverse range of events), but at the minimum, “if you’re the sort of person with a strong opinion and are willing to go to the lengths to place a bet with Caplan and you like the terms he proposes… maybe think it through extra carefully?”, because historically, the people in your camp have held a losing hand. On the other hand, maybe you’re placing that bet about global temperatures, or maybe you’re placing that bet about EU membership and your bet was fine but it came down to a close coinflip.
Forecasting records are tricky, and I do respect Caplan’s approach. As limited as it is, it’s better than what most people can point to.
[1] http://standupeconomist.com/2021-update-on-my-global-warming-traffic-light-bet-with-bryan-caplan-and-alex-tabarrok/
I’d bet that at the end of Biden’s presidency, the annual mean temperature is higher than 2021. This has so far happened for 9/10 democrat presidents*, since records began in the 1880s:
https://i.ibb.co/rZmp6rc/temp-By-Pres2020.png
* It used to be 10/10 but the 1960s values changed for some reason since 2017 or whenever I first noticed this, so now JFK oversaw a slight cooling.
Hedonic hedging is another potential bias for betting markets tied to events that affect people’s welfare in ways beyond the payout.
Even if Dr Evil’s odds in an election are overvalued, I may still bet on him as a means of equalizing my welfare between the likely world where he loses and the tragic but unlikely world where he wins.
“People come at him with some strong, unrealistic opinions, and he’s been good at crystallizing these into bets.”
This is a very good point. “Betting” is a concrete interpretation of some phenomenon of interest. A climate changer denier, for example, could consistently make money, and for the sake of argument we’ll say lots of money, betting about climate change, given how the betting parties have chosen to interpret its real world effects. The denier may have the phenomenon completely wrong and still win because the particular betting conditions favor him.
Many of these bets were pretty favorable, to say the least, like the guy betting even odds that Ted Cruz would win the Republican nomination back when there were 14 remaining candidates and Donald Trump was described as the “front runner.” That’s just an awful bet. The same with Johnson earning at least 5% of the vote at even odds. In the end, he had attained a tad over 3%, which was the highest since Ross Perot. So, obviously, it’s ridiculous to have assumed that there’s a 50% chance of him getting at least 50% of the vote.
Also, lol at Cowen’s bet that unemployment wouldn’t fall under 5% in 20 years, giving 10:1. Twenty years! Guess they need some gambling questions on the GRE.
*5% of the vote.
I have a standard schtick in which, when someone claims something is “impossible” or “certain”, I offer to bet on it. I’ll say “If you think it’s a sure thing, you should be happy to offer 10:1 odds. I’ll bet $10 to your $100. It’s an easy $10 for you!” It turns out that when money is on the line, people’s “revealed odds” are a _lot_ closer to 50-50 than they blithely announce. People will say something is a “sure thing” when they really mean it’s 70-30 or something.
Actually this reminds me of a friend who said, after Trump was elected, that she would “never trust Nate Silver again” or something like that. I pointed out that the day before the election fivethirtyeight.com gave Trump something like a 25% chance of winning — or maybe it was 20%, or 30%, I don’t remember exactly but it was a long way from a sure thing — and that if someone says something has a 25% chance of happening, and it happens, you can’t really claim that they were badly wrong. And she said “oh come on, 75% is like a sure thing!” I told her never to go to Vegas.
Mostly I think it’s strange that intelligent people would take most of these bets. There are maybe two or three in which I would have considered betting against Caplan, but the rest seem like sucker bets. How do these people convince themselves that something that is rather unlikely is actually better than 50/50?
RE: “How do these people convince themselves that something that is rather unlikely is actually better than 50/50?”
Most likely they don’t. If the stakes are low enough, the statement they are making by supporting their favored side of the proposition is worth the cost of (quite likely) losing the amount of the wager.
They are literally putting their (little bit of) money where their (big) mouth is.
+1. The bet has promotional value greater than the cost of a loss
That’s kinda gross. Doesn’t the money get all soggy? I guess I’d rather be paid with saliva-covered money than not get paid at all, though.